What to Expect from the US Inflation CPI Report Before the FED?

The CPI inflation report today holds significant importance and all details will be under the spotlight by the FED by investors alike, as it will be released just before the FOMC meeting which will take place this evening. The FED has left the fate of rate cuts subject inflation and economic data, so today’s CPI figures will provide insights into inflationary pressures in the economy as well as the FED projections, as Timiroas said that they might even alter the Dot Plot.

Market reactions will likely depend on whether the CPI figures meet, exceed, or fall short of expectations. A lower numbers could lead to buying in risk assets and selling in the US dollar, as investors become more comfortable with lower inflationary pressures. However, we traders are looking closely at the details now, which have taken extra importance.

Conversely, an undershoot in headline inflation, particularly if attributed to energy prices, might be viewed with caution, given market skepticism about the volatility in petrol prices. Given the significance of the CPI report and its influence on the Fed’s decision-making, short-term trading will be dangerous today, especially considering the data will be followed by the FOMC meeting.

Expectations for the US CPI Report and Fed Decision

CPI Inflation Projections:

• Headline USD CPI:

  • Year-on-Year (YoY): Expected to rise by 3.4%.
  • Month-on-Month (MoM): Expected to increase by 0.1%.

• US Core CPI:

  • Year-on-Year (YoY): Expected to increase by 3.5%.
  • Month-on-Month (MoM): Expected to rise by 0.3%.

Market Considerations:

• Bank of America Estimates:
  • Unrounded headline CPI expected to rise by 0.13%.
  • Unrounded core CPI expected to rise by 0.30%.

Market participants will scrutinize the composition of the CPI data more than the small rounding discrepancies. Particular attention will be given to services minus shelter rent, which previously fell to +0.2% from +0.65% in April. Rentals and owners-equivalent rent (OER) have remained steady at +0.4%, but are expected to fall sharply in the coming months. The FOMC expects a decline in home-related inflation due to lagging indicators compared to more recent market rents, while OER rose by 5.75% in April, but the trend might reverse soon. So everything will be important in this report.

Market Reaction:

• Sentiment:
  • The market is becoming more comfortable with the prospect of lower inflation but is now starting to worry about slowing GDP growth.
  • The strong bidding in Tuesday’s $39 billion Treasury auction indicates investor confidence in lower inflation expectations.
• Bond Yields:
  • Ten-year yields have been making a series of lower highs in both short and longer terms, indicating a bearish sentiment on yields.
• Trading Strategy:
  • If the CPI report aligns with expectations, this could lead to buying the dip in risk assets and selling the US dollar on rallies.
  • Conversely, if the headline inflation undershoots primarily due to energy prices, there could be caution as the market remains skeptical about petrol price volatility.

Short-Term Trading Caution:

• FOMC Meeting:
  • The CPI data will be released just before the FOMC meeting, adding complexity to the immediate market reaction.
  • Serious money may hold off making significant moves until Thursday, after the Fed’s decision and subsequent analysis.

Conclusion:

The CPI report and the Fed’s response will be pivotal for market direction. While lower inflation could spur risk asset buying and US dollar selling, caution is warranted due to potential volatility and the proximity of the FOMC meeting. So, traders should closely monitor both the CPI data and wait for the Fed announcement later in the evening, keeping in mind the broader economic implications and market sentiment.